The scenario in the spreadsheet has an initial investment amount (25,000) that is not borrowed. note: it seems wrong the invested amount can over double in 12 months

I need help working out a scenario where the initial investment (25,000) is borrowed (at 8.2%). If the money is borrowed for investment purposes, the interest paid for the investment loan is 100% tax deductible, right? This is where I am stuck... what do I need to consider? What will the returns look like with the introduction of the 8.2%?

If this is not enough info, please let me know. As I said in the post, I don't have a clear picture (understanding) in my head.

... you are considering borrowing money and paying 8.2%pa interest and using that to invest in something returning 7.5%pa ? Is that correct ?

You are correct that if you borrow for investment purposes, then all of the interest on that borrowing is tax deductible. One thing I think you are missing is that the income you earn must also be declared - and you will pay tax on that (there's no free lunch here!).

So ... it doesn't matter about the tax deduction at all ... the nett effect is that you have to earn more than you pay in interest - otherwise you will be going backwards.

In other words ... paying 8.2% interest to earn 7.5% return is not a good idea.

No - you don't get it "all" back - you don't actually "get it back" at all, the interest expense is offset against your income. At best, you will get a benefit of no more than 47.5% on the money you have spent (assuming you are in the top tax bracket ... if you are in a lower bracket, the benefit is correspondingly less).

Time to do some real-life sums for you.

We'll use your scenario:

1. borrow $25,000 @ 8.2% interest

2. annual interest cost is $2,050 (assuming it is charged monthly and you pay it monthly - ie no compounding)

3. invest money at 7.5% return (let's assume monthly compounding)

4. annual return = approx $1,940 income

5. you earn $50,000 per annum salary before tax with no other expenses or income (tax already taken out from your pay = $9,600 plus medicare levy ... which we will ignore)

6. income from investment is added to your before-tax salary income = $51,940 gross income before tax

Thanks for the great reply Sim. With the example you gave it's starting to come together for me. I will reply again later or tomorrow after I chew on this for a while and I'll do a couple of scenarios based on your reply (helps with the learning process... slow huh?!).

Rob. Absolutely! 7.5% is a great rate. This is offered by Westpac, it's a product called 'Maxi Saver'. You get 6.5% but if you don't withdrawal within a month you get a bonus rate of 7.5%.

Sim, I'm working through your example each step at a time. When I'm OK with it all I'll do a scenario with a higher income and lower income, also with a higher invested amount. In your example, there are a couple of things that's doing my head in....

I assumed monthly compounding interest ... so at the end of month 1 you have earned $25,000 * (7.5% / 12) = $156.25, at the end of month 2 you earn $25,156.25 * (7.5% / 12) = $157.23, at the end of month 3 you earn $25,313.48 * (7.5% / 12) = $158.21 ... etc.

Your figure of $1,875 was based on an annual "simple interest" return of $25,000 * 7.5% ... mine had interest compounding monthly.